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Sunday, 10 August 2014

EFFROTS TO STABILIZE RUPIAH

The euphoria of Rupiah’s
sudden upjump against USD at the moment of quick count result announcement at
the Presidential election on July 3,2014 last was only momentary. Rupiah
strengthened dramatically from Rp 12,000 to Rp 11,550.- per USD the moment
election outcome was known.

However, the Government and BI must not be off guard
because of Rupiah sudden strengthening since Indonesia’s fundamental economy,
the actual foundation of Rupiah value, was still shaky. So the effort to
stabilize Rupiah should be on top national agenda to ensure sustainable
economic growth.

As predicted, depreciation of Rupiah value against USD
was a hot topic of discussion in many for a because of its chain effect on many
areas like import which became more costly. And yet the manufacturing industry
still had to import 40% to 60% of overseas loan due which turned higher in
Rupiah.

Not just that. Rupiah depreciation would weaken
competitiveness of Indonesian export commodities because exporters had to
increase export price due to increased production cost; a pity because low
price of exported goods had been Indonesia’s plus point.

Rupiah depreciation was also made worse by the Fed’s
policy in the USA who planned to run Tappering Off as economic condition turned
better, which was indicated by drastic downturn of unemployment level which came
to only 6.7%. Moreover the Fed also signaled to increase benchmark rate net
year which stimulated capital owners in America to transform their asset into
USD because it was more attractive.

Other depreciating factor to Rupiah was Law No. 42 year
1999 on Forex traffic and exchange rate system where it was explicitly stated
Indonesia adopted Free Forex Regime, where anyone might bring in and out
foreign currency including USD in vast amount was transferred to overseas banks
because the interest was more attractive, it was fully permissible.

Another cause of Rupiah depreciation was the wedding
deficit in trade balance. This was due to downturn of non oil-gas export on
account of falling primary commodities price in the world market and declining
purchasing power among buyer countries, i.e. China, India, Japan, and the
Middle East.

The swelling deficit in trade balance was also due to
growing import of oil although price of oil had been increased at home on June
22, 2013 last, causing Rupiah value to slump as forex income export was less
yhan import. This means supply of USD was reduced or demand for USD increased
due to increased import, causing Rupiah value to be unpredictable.

Rupiah weakened in moments before the election, soaring
through Rp 12,000 per USD but tend to fluctuate, a condition which was
different from last year when Rupiah value dropped drastically. At that time
USD rushed for hometown as foreign investors panicked due to Tappering Off
policy by the Fed.

Apparently low supply of USD affected the currency market
at home, which made USD to strengthen and Rupiah nose dived down even to as low
as Rp 12,000 per USD triggered by external condition, among others the
geo-political condition in Iraq. Meanwhile at home there was pressure on
current transaction as investors waited for the election outcome on July 9.
Hopefully after the election the climate would be better for Rupiah.

In the future, although it was hard to predict Rupiah to
be back to the Rp 10,500 per USD level, it could still be expected to reach Rp 11,000.-
level. The estimate was inclusive of some economic risk, internally or externally.

The threat of deficit in current transaction forced was
Government to safeguard Rupiah for the sake of export and to reduce import.
Rupiah stood a change to strengthen as some BUMN companies did hedging in
paying their overseas debt.

It was generally agreed that hedging of foreign currency
by BUMN as not disadvantageous and even bring positive impact on Rupiah.

The only thing was that BI’s assumption for Rupiah in
RAPBN State Budget 2015 to be around Rp 11,900 – Rp 12,100 per USD forced speculators
to re-calculate which made Rupiah fluctuate aimlessly through 2015. Indonesia
was still under the pressure of deficit and might need 2 to 3 years time to
recover.

Only trouble was that by the time USD flowed out of the
country, the demand for it increased at home due to swelling import of oil; not
to mention to pay installment of overseas debt due and dividend for foreign
shareholders. there was under-supply of USD as export dropped while the need to
import raw materials, product components and capital goods strengthened. Under
such circumstance current transaction was pressured and Rupiah sank even
deeper.

The reasonable way to strengthen Rupiah was to go back to
basic: strengthen fundamental economy, squeeze down deficit in current
transaction through reduction of subsidy for oil and electricity, minimize
import and boost export of non oil-gas commodities. Accordingly effort must be
enhanced to lessen overseas debt. It was better to borrow money from domestic
resources. Even if it was inevitable to borrow from abroad, it pays to do
hedging. (SS)

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